Tenant Improvements, Insurable Interest, and a Lease Waiver
A bakery leases space in a Hartford building under a ten-year lease with three years remaining. The lease requires the landlord to insure the building and requires the tenant to insure its trade fixtures, inventory, and tenant improvements and betterments. The lease also contains a mutual waiver of subrogation. A fire destroys the bakery’s interior build-out, inventory, and equipment. The tenant’s commercial property policy has a $150,000 tenant improvements and betterments limit, actual cash value valuation, a $5,000 deductible, and a $75,000 business income limit. The tenant’s build-out originally cost $180,000 and has $72,000 in depreciation. The insurer says the tenant has no insurable interest in the improvements because they are attached to the landlord’s building, and it offers nothing for the build-out. The landlord’s insurer is separately paying to restore the building shell. The public adjuster must respond.
1. Does the tenant have an insurable interest in the tenant improvements and betterments?
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Yes. Insurable interest is a financial interest in the property such that its loss causes the insured a pecuniary loss. The tenant paid for the build-out, uses it in the bakery, and the lease makes the tenant responsible for insuring it. The fact that the improvements are attached to the landlord’s building does not eliminate the tenant’s interest. The tenant may also have a leasehold interest if the lease continues and the space cannot be used. The insurer’s argument confuses ownership of the realty with the tenant’s contractual and financial interest in the improvements. The public adjuster should provide the lease, the construction invoices, the depreciation schedule, and photographs showing the tenant’s build-out. The adjuster should also coordinate with the landlord’s insurer to avoid double recovery for the same items.
2. Calculate the tenant improvements payment on an actual cash value basis under the policy.
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The policy insures tenant improvements and betterments on an actual cash value basis, with a $150,000 limit and a $5,000 deductible. Actual cash value is replacement cost less depreciation, or in this case the original cost less depreciation: $180,000 − $72,000 = $108,000. The $108,000 is below the $150,000 limit, so the limit does not reduce the loss. Subtract the deductible: $108,000 − $5,000 = $103,000. The deductible applies once per occurrence, not separately to each item or coverage part unless the policy says otherwise. The adjuster should confirm whether business income has its own deductible and whether any ordinance-or-law coverage applies to code-required upgrades.
3. How does the lease’s mutual waiver of subrogation affect the claim and the insurer’s rights?
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The waiver does not eliminate the tenant’s coverage. It limits the insurer’s ability to pursue the landlord after paying the tenant. The tenant’s insurer steps into the tenant’s shoes and takes the tenant’s rights, including the effect of the waiver. If the lease waives subrogation against the landlord, the insurer generally cannot sue the landlord for the fire loss. The public adjuster should provide the lease to the insurer and explain the waiver. The adjuster should also check whether the landlord’s insurer is paying for overlapping items, such as the shell or the build-out, because the insured cannot recover twice for the same loss. If the landlord’s policy pays for the tenant improvements, the tenant’s insurer may take the position that its coverage is excess or that the tenant has no net loss for those items.